Brazilian issuers eye securitization funding

Brazilian banks and corporates are reacting to the loss of the
sovereign’s investment-grade rating by
assessing the viability of securitization. Bankers report a
growing interest among financial institutions in diversified
payment rights (DPRs) transactions, but so far there has been
just one issue from Bradesco since the downgrade late last
year.

"Brazilian banks might move towards DPRs in case credit
markets remain tight," says José Rudge, head of fixed
income and structured products for Itaú BBA in Sao
Paulo. "This was a normal funding instrument for banks in the
early 2000s, and we saw some in 2008 and one late last year [a
private placement for Bradesco]."

Rudge adds: "Since Brazil lost its investment-grade
rating, we have been discussing structured deals with
Brazilian banks and other companies as a means to use
collateral to get the credit enhancement and move
transactions back into investment-grade territory."

Germana Cruz, head of financial institutions, Latin America
on securitization, at Standard Chartered, says she has also
been fielding more questions from the country’s
banks. "Interest in securitization has picked up since the
Brazilian sovereign rating started to deteriorate last year.
This comes as little surprise as securitizations are known as
the best rainy-day solution that helps lower funding costs."
Cruz adds that banks typically use commercial payments for
securitization programmes.

Germana Cruz,
Standard Chartered

Cruz says that banks across Latin America are receptive to
such issuances when and if the execution is fast, which favours
a private-placement structure – as does the typical
deal size.

"There have been some deals concluded as private placements
since December 2015," she says. "This is the best format
because such deals start at $100 million, and the pricing
remains undisclosed, which in turn offers more comfort to the
banks concluding them."

DPRs were commonly used in Brazil in the early 2000s to
enable banks to achieve investment-grade ratings. The
overcollateralization enables a two-to-three notch upgrade
– but the investor universe is limited, according to
rating analysts.

"These DPRs are the cheapest way for non-investment-grade
banks to access dollars, so I think we will see the large
Brazilian banks all issuing these deals particularly as they
have a number of bonds that they need to finance and repay,"
says Sergio Garibian, head of the banking team at Standard
& Poor’s in Brazil. None of the large
Brazilian banks would comment on their likely issuance of DPRs
when asked by Euromoney. "However, I don’t see the
mid-sized banks accessing the same market," says Garibian.

The agency also suggests that investor interest should be
strong, given the structure’s historical
performance: "Emerging market financial future flows have
performed exceptionally well; all Fitch-rated programmes have
paid debt service on time [and] according to schedule and
several transactions did so despite severe sovereign
stresses... There has never been a default related to a
financial future flow transaction."

Corporates are also looking at securitizations to enable
access to international investors and secure lower costs of
funding. Bankers say they are rolling over bank debt, but the
local markets lack the depth to enable companies to secure
longer-term financing. There has been a spike in request for
Chapter 11-type bankruptcy protection, and a large part of this
is linked to the 20% yields that domestic institutional
investors expect – with international investors not
well-disposed to fresh debt from Brazilian corporates.

First deal

On March 10, Brazil issued its first senior unsecured
benchmark deal since it lost its investment grade. The issuer
had been absent from the international markets since 2014 and,
therefore, this was an important transaction.

The sovereign transaction, led by Bank of America Merrill
Lynch and JPMorgan, offered a new issue premium of just 10
basis points with a total order book of $6 billion. A source
close to the national treasury reported that the decision to
issue the bond was made to take advantage of the recent fall in
outstanding sovereign yields.

However, the increased chance of impeachment of president
Dilma Rousseff caused that rally, so officials were uncertain
whether the ministry of finance would withhold approval to tap
the markets.

DCM bankers say any further steps that make impeachment a
near certainty could lead to a spike in sentiment that could
bring a flurry of deals.

"We are ready to work three nights straight to get some
deals priced," said one DCM banker. "We would want to issue
before the dust settled and before investors began to realise
that as far as the desperately bad Brazilian economy is
concerned, impeachment doesn’t really change
anything."

Add Your Comment

All fields are compulsory

All comments are subject to editorial review as we are subject to the same regulations adhered to in publishing our own content. For this reason, your comment may not be live immediately, or may not be published.

Magazine

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms & Conditions, Privacy Policy and Cookies Policy before using this site.